USDA Livestock, Dairy and Poultry Outlook

USDA Livestock, Dairy and Poultry Outlook - August 2012

High feed costs from lower US corn and soybean production is expected
to reduce US pork production in 2013. Per capita consumption of pork products in
2013 are expected to decline by 1.23 percent. Next year, per capita consumption of red
meat and poultry is expected to drop below 200 pounds per person for the first time since
1990. US pork exports increased more than 8 percent year-over-year in the second
quarter of 2012. In the first 6 months of 2012, China was the third largest foreign
destination for US pork products. Exports in 2013 are expected to be about equal to
shipments in 2012.

Pork/Hogs

Drought To Affect 2012 Pork Production

Significantly higher feed costs from reduced expectations for US feed grain
production as a result of drought and persistent, high temperatures in Mid-western
States will all but certainly have a negative impact on US pork production next
year. With 2013 USDA forecast prices for corn at $7.50-$8.90 per bushel, and 48
48-percent soybean meal at $460-$490 per ton, the spread between estimated costs
of feed and hog prices is negative. Persistent negative feeding spreads suggest that
most producers, unable to cover variable costs of production, would exercise some
means of reducing hog production to limit operating losses.

USDA is forecasting 2013 pork production at almost 23 billion pounds, about 1.3
percent lower than estimated production this year. Lower 2013 production levels
are expected to be achieved primarily through a combination of lower farrowings—
from reduced breeding inventory numbers—and lower slaughter weights. Hog
prices in 2013 are expected to reflect lower available animal supplies. Prices of live
equivalent 51-52 percent lean hogs are expected to average $62-$67 per cwt in
2013, almost 3 percent above prices this year.

Projected pork production levels for 2013 would reduce per capita pork
consumption to 45.2 pounds per person, down more than 1 percent from forecast
2012 per capita consumption. When lower per capita estimates for pork, beef, and
poultry are combined, US per capita meat and poultry consumption is expected to
decline next year to 197.7 pounds per person, 2.5 percent lower than 2012. This
would be the first time since 1990 that total meat and poultry consumption per
capita has dropped below 200 pounds per year. Retail pork prices next year are
expected to reflect lower pork supplies, and to average about $3.50 per pound.

China Firmly Ensconced in Top-Three Foreign Destinations for US Pork
in 2012

In the first 6 months of 2012, US exporters shipped more than 2.7 billion pounds
of pork to foreign destinations, 12 percent more than a year ago. The top 10 foreign
buyers of US pork products are listed below.

While Japan remains far and away the largest foreign buyer of US pork products,
US shipments to Japan through June were 4.6 percent lower than during the same
period last year. Japanese data for ending stocks suggest that strong first-quarter
Japanese pork imports combined with slowed product disappearance boosted
ending stocks above recent averages. It is likely that as stock levels moderate,
Japanese imports will accelerate.

China has become the third largest foreign destination for US pork so far in 2012.
Through June, Chinese imports of US pork products were over 365 million
pounds, more than double shipments during the same period last year. With strong
year-over-year shipments through June, China now accounts for more than 13
percent of total US pork exports, up from a 6.4 percent share a year ago (see table
above). Recent news reports indicate that the Government of China has announced
a round of pork purchases to support the pork sector during a period of low product
prices. The figure below shows that weekly hog prices for the major producing
region of Sichuan have recently dropped below the 2009-2011 average, and have
traded significantly below 2011 prices since early April. The impact of such a
program on Chinese pork imports remains unclear. Retail prices of pork products
and pork producer returns likely will continue to be the key determinants of Chinese
demand for imported pork products.

US pork exports are expected to be 5.396 billion pounds this year, 4 percent higher
than in 2011. In 2013, exports are expected to be about equal to shipments this
year. Higher US pork prices from lower production next year may limit shipments
to some foreign markets. Higher world feed costs however, may reduce foreign
pork production and induce pork imports from the United States. Because feed
costs are expected to be higher almost everywhere, it is likely that the United States
will remain among the world’s low-cost pork producers.

Beef/Cattle

Drought Impacts the Cow Herd and Cow Prices

The deterioration of the corn crop and pastures in the last 6 weeks is not news at
this point. At the same time, drought effects on cow slaughter and cattle feeding
have become more apparent. Reports indicate that some drought-impacted corn is
being ensiled. To the extent corn is being ensiled, the ensilage could provide an
alternative for growing feeder cattle to feedlot-placement weights. Note that some
form of feed will be necessary to carry feeder cattle from when they are removed
from drought-damaged pastures until the silage has been in silos long enough for
the fermentation process to reduce the nitrates in the corn-plant material sufficiently
to keep from poisoning the cattle. Hay supplies also are reduced. Emergency
grazing and haying of Conservation Reserve Program acreage may offer another
option for farmers.

Weekly federally inspected cow slaughter has increased dramatically since early
June 2012, with the increase in beef cow slaughter largely in response to the rapidly
deteriorating pasture conditions. As a result, weekly average federally inspected
90-percent lean cutter cow dressed prices, which remained within $5-$6 per
hundred pounds (cwt) of their late-May highs, have declined $15 per cwt to around
$150 per cwt.

...And Puts Cow-Herd Expansion Plans on Hold

USDA, National Agricultural Statistics Service’s (NASS’) July Cattle report
indicated that expansion plans have been temporarily suspended as there were no
year-over-year changes in beef replacement heifer inventories and dairy
replacement heifer inventories declined 2 percent largely as a result of depressed
milk prices and increasing feed prices. Further, beef heifer inventories may have
declined since the July 1 survey as a result of subsequent drought effects on
pastures. To the extent drought has reduced producer heifer-retention plans, it
likely understates the full extent to which heifer retention has been put on hold and
will likely show up as continuing liquidation in the January 1, 2013
inventory report.

In 2011, drought thwarted Southern US producers’ plans for cow-herd expansion.
Farther north in 2011, producers held heifers and cows for herd expansion and, to
some extent, possibly kept extra-large inventories in light of the significant herd
reductions underway in the Southern United States. In 2012, those northern
inventories may have shrunk in response to the Central and Northern Plains and
Midwest drought, which, combined with continued liquidation in the South, have
exacerbated the inventory situation.

Ironically, based on estimates of the total number of beef heifers entering the herd
(see http://www.ers.usda.gov/data-products/livestock-meat-domesticdata.
aspx#26182), the national beef-cow herd appears to be getting younger on
average. The number of beef cows reported on January 1 has declined every year
since 2006. The January 1 inventory of beef heifers intended for replacements has
also declined every year since 2006, except for the January 1, 2012 inventory,
which was up 1.4 percent. The ratio of total January-June beef-cow disappearance
reached 6.7 and 6.6 percent in 2010 and 2011, respectively, while, this year, disappearance was 6.3 percent, near the average for 2001-10. Combining these
inventory dynamics, the number of beef heifers entering the beef-cow herd in
January-June was almost 2.6 million in 2011 and 2.5 million in 2012, the largest
January-June increases since at least 2001. The proportion of beef heifers entering
the beef-cow herd for January-June reached 50.5 percent in 2011 and 48.1 percent
this year, the two highest proportions in the last 11 years (average of 41.9 percent
for 2001-10). As a result, producers appear to be replacing beef cows with younger
beef heifers, which are slightly cheaper to maintain, but at the possible expense of
pounds of calf for sale due to the heifers’ productive immaturity.

Drought Also Impacts Cattle Feeding

Rebuilding the national cow herd will have an adverse effect on feeder cattle
supplies and subsequent beef supplies because heifers retained for breeding are no
longer available for placement on feed, reducing the subsequent number of cattle on
feed and beef supplies from their slaughter. This effect will last until enough
heifers have been retained for enough years to produce enough calves to be fed out
and slaughtered to replace heifers that were retained and not placed on feed.
Heifers retained for herd rebuilding in 2013 will be bred in 2014 and then will calve
in 2015. Those calves could be slaughtered for beef in 2016 or 2017.

Throughout 2012, supplies of feeder cattle outside feedlots have been at historic
lows since the series began in December 1995 (http://www.ers.usda.gov/dataproducts/
livestock-meat-domestic-data.aspx#26184) and, with July 1, 2012 supplies
3.2 percent below the July 1, 2011 estimate, have averaged a 3.37-percent decline
year over year for every quarter in 2012. While there is much discussion of a
shortage of feeder cattle, cattle-feeding profits and packer margins near or below
zero would seem to imply that the perception of a shortage is relative to total
feeding and processing capacities rather than a confluence of supply and demand.
Further, supplies of cattle on feed for more than 120 days this year are the highest
July-1 supplies since records began in December 1995. Retail beef prices at or near
record levels are not at levels high enough to support profits throughout the beefcattle
market system.

Some locations in the Southern Plains have received enough precipitation to raise
hopes for wheat pasture for feeder calves this fall and winter. However, prospects
in most of the winter wheat area are not good, especially in the western winter
wheat area of the Southern Plains. Should wheat pasture materialize, it could have
a positive effect on heifer and cow retention, as well as provide a lower-cost option
for growing feeder cattle to feedlot-placement weight.

Fed cattle prices have improved over the last couple of weeks, but the improvement
has not been sufficient to put cattle feeding into the “profitable” range. According
to the Sterling Profit Tracker reported in the Drovers’ Cattle Network
(http://www.cattlenetwork.com/e-newsletters/drovers-daily/Cattle-feeding-marginsimprove-
packer-margins-erode-165338486.html), both cattle feeders and beef
packers are in negative territory. As of August 11, the USDA, Agricultural
Marketing Service’s (AMS) weekly Choice cutout values have declined 8 percent
since their mid-June 2012 weekly high.

The tradeoffs between the desire to place heavier-weight feeder cattle with highpriced
corn and the necessity of removing lighter-weight cattle from droughtdecimated
pastures and placing them in feedlots despite high-priced corn may lead to a bimodal distribution of fed cattle and finish/dressed weights. Since 2008, the
proportion of first-half under-600-pound feeder cattle placements to total
placements in 1,000-head-plus feedlots has increased steadily from 20.4 to 24.2
percent. Over the same period, the proportion of first-half over-800-pound feeder
cattle placed declined steadily from 29.3 to 27.4 percent in 2011, then increased in
2012 to 30.7 percent. Over these same periods, first-half under-600-pound feeder
calves increased from 2.085 million head in 2008 to 2.570 million head in 2012,
while first-half over-800-pound feeder cattle have moved erratically from 2.985
million (2008), 2.870 million (2009), 2.980 million (2010), 2.945 million (2011), to
3.260 million (2012).

Pasture conditions were relatively normal during 2007-10, which would have
increased the incentive to place higher proportions of the available over-800-pound
feeder cattle. Further, the increasing proportion of under-600-pound feeder calves
placed was consistent with declining corn prices from 2008 through 2010 during
which first-half corn prices declined from $4.85 to $3.51. In 2011 and 2012,
proportions of drought-motivated placements of under-600-pound feeder calves
continued to increase despite corn prices of $6.05 in 2011 and $6.29 in 2012. The
differences in prices between 500-to-550-pound and 750-to-800-pound Medium and
Large No.1 steers at Oklahoma National Stockyards, Oklahoma City also reflected
the relationships between corn prices and placement weights. Feeder-cattle price
differentials averaged from $17.33 per cwt to $18.78 from 2008 through 2010 then
widened to $20.98 in 2011 and $36.46 in 2012 where the widening price
differentials reflect the increasing costs of feeding lighter-weight calves.

...And Beef Production

Estimated commercial steer and heifer slaughter for the first half of the year was
almost 4 percent below first-half 2011, and estimated first-half commercial cow
slaughter was 2.5 percent below year-earlier slaughter. Despite these declines,
commercial beef production for the same period was down 1.6 percent. The
disproportionately smaller decline in beef production resulted from federally
inspected first-half 2012 dressed weights that averaged 2.1 percent above first-half
2011 weights for all cattle, including 2 percent above year earlier for steers and 2.4
percent above for heifers.

Increased cow slaughter led to an increase in the supply of 90-percent and other
lean-beef supplies to the detriment of prices for those products. Although they have
declined, both cow prices and lean-beef prices have remained relatively strong over
the last couple of months. However, the price of 50-percent lean trim has declined
to less than $45 per cwt partly in response to the continuing negative bias against
using Lean Finely Textured Beef in ground beef products (see special article).

July 2012’s monthly retail price of $5.01 per pound for Choice beef—up 1.6
percent from June 2012’s $4.93—was only 1.6 percent below January but above
April-through-June prices, reflects a continuing decline from January’s record of
$5.09 per pound. At the same time, July’s monthly average retail price of $4.72 per
pound for All-fresh beef reflects a new record less than 1 percent from June’s $4.71.
All-fresh beef prices are not reflecting weakness in demand for middle meats as are
the prices for Choice retail beef.

Beef/Cattle Trade

US beef imports through June were 19 percent higher than year-earlier levels.
Imports were stronger from Australia, Brazil, Uruguay, and Mexico thus far in
2012, but US imports from Australia have posted the largest gains at 76 percent
higher year over year. Although imports last year from Australia were tightly
constrained, Australia is historically one of the largest exporters of beef to the
United States. This year, 28 percent of total beef imports came from Australia,
compared with 19 percent over the same time period last year. Imports from
Mexico and Uruguay were 42 and 49 percent higher, respectively, year over year.
Imports of beef from Mexico have steadily trended upward over the past several
years and months, as this market continues to direct product for export. Imports
from Uruguay are higher after several consecutive years of decline. Total US beef
imports for 2012 are forecast at 2.46 billion pounds, or 19 percent higher than yearearlier
levels. Growth in import levels is expected to continue into next year with
imports forecast at 2.62 billion pounds.

US beef exports have been somewhat constrained through this year. Largely
hampered by a stronger US dollar, export levels through June have been 11percent
lower year over year. The top four US beef export markets—Japan, South Korea,
Mexico, and Canada— have all posted declines in US beef imports, but declines
through June have been the strongest from South Korea ( down 27 percent)
followed by Mexico ( down 17 percent), and then Canada ( down 10 percent) and
Japan ( down 4 percent). Lower import levels are forecast through the remainder of
2012. Third and fourth quarter exports are forecast 13 and 8 percent lower,
respectively, and total exports for 2012 are expected to be 11 percent lower at 2.48
billion pounds.

Cattle Imports 22 Percent Higher Through First Half of 2012, Expected to
Tighten into 2013

Cattle imports through the first half of the year were 22 percent higher than a year
ago. Imports are higher from both Mexico (up 31 percent) and Canada (up 6
percent). Feeder cattle have been pulled from both borders, as the increase in
Canadian cattle imports also has been feeders. According to AMS weekly reports,
Canadian feeder cattle imports were 78 percent higher through July, year over year.
As total North American inventories are constrained, however, we should expect to
see total cattle import numbers trend downward. In Mexico, the wet season weather
pattern now in play will decrease some of the cattle numbers crossing the border.
Weather conditions, and thus grazing options, this fall will also determine the extent
to which cattle import numbers from Mexico seasonally spike. However, imports
from Mexico have been at relatively higher levels, compared with inventory, for the
past few years and into 2013 total exportable supply may become an increasingly
important factor for US cattle imports from Mexico. Total US cattle imports are
forecast at 2.175 million head for 2012 and at 2 million head for 2013.

Special Article

Inclusion of Lean Finely Textured Beef (LFTB) in certain ground meat products has
raised concern among some consumers partly as a result of the negative connotation
associated with “pink slime” associated with the products. LFTB is an inexpensive,
FDA-approved lean beef product made from low-valued fatty trim (50-percent
lean). LFTB is first treated with an antibacterial agent (ammonia) to make it
virtually pathogen free, and then combined with 90-percent lean beef and other fatty
trim to produce ground beef and beef-based processed meats. The conversion rate
of extra fat trim to LFTB is 3 to 1, or 3 pounds of fat trim to produce 1 pound of
LFTB. Demand for LFTB recently declined following media reports portraying it as
a seemingly unappealing additive to ground beef products.

These events followed former United States Department of Agriculture (USDA)
scientist Gerald Zirnstein’s March 2012 comment that 70 percent of the ground beef
sold in supermarkets contained LFTB. In addition, ABC News’ report about the use
of LFTB in retail beef products led to media coverage publicizing LFTB as pink
slime, a term originally coined by Zirnstein in 2002. On March 21, 2012, Safeway,
SuperValu, and Food Lion announced they would stop buying ground beef with
LFTB (Avila, 2012). Soon after, Kroger, BI-LO/Winn Dixie, Giant, and Hy-Vee
announced that they would discontinue stocking ground beef that contained LFTB.
Costco and Whole Foods reported that they did not carry ground beef with LFTB,
and Walmart stated that consumers would have the option to purchase ground beef
with or without LFTB.

Some manufacturers of lean beef products have been affected by the actions of
these retailers. Beef Products Inc. (BPI) manufactures LFTB, and Cargill produces
finely texturized beef (FTB), a similar product. BPI announced in late March 2012
that it would shut down three of its four plants (Garden City, Kansas; Amarillo,
Texas; and Waterloo, Iowa) and lay off 650 workers due to reduced demand from
supermarkets for ground beef containing LFTB (Keefe, 2012). It was estimated at
that time that BPI’s average daily LFTB production capacity would drop from 1.5
million pounds per day to 700,000 pounds (Kay, 2012).

Market Implications

Fifty-percent lean beef trimmings, which come from fed cattle (steers and heifers),
are blended with leaner processing beef and used to produce LFTB. Leaner
processing beef comes mostly from cows, bulls, and imported processing beef, but a
small portion does come from fed cattle. Since some lean processing beef and 50-
percent lean beef trimmings are derived from fed cattle, supply effects on fed cattle
prices are unclear.

Although LFTB is a lean product, it is made from fat trimmings that otherwise have
less value and typically sell at a discount to a rendering plant. Fifty-percent lean
beef trimmings account for about 10 percent of total carcass weight (Steiner
Consulting Group, 2012). In addition, beef packers generate more value to fed cattle
from an additional 5-10 percent of total carcass weight as extra fat trim, and those
components are used jointly to produce LFTB. Decreased demand for ground beef containing LFTB implies that packers now have to sell a larger portion of fat
trimmings at lower prices, reducing fed cattle values (CME Group, 2012).

Several effects of the lost use of LFTB are evident. LFTB adds value to a carcass
by utilizing a few more pounds of beef that would otherwise be used in rendering.
According to Steiner Consulting Group (2012), an additional 900 million pounds of
extra fat trimmings would be available each year in the absence of a market for
LFTB. The cut in the demand for LFTB has reduced the market for excess fatty
trim. The value of 50-percent trim has declined and as trim comprises a small share
of the value of each primal cut that contributes to the calculated carcass value, the
decline impacted the value of a fed carcass. The price of fresh 50-percent lean beef
trimmings has declined from $1.01 in February 2012 to $0.59 in April 2012, due at
least partially to the lost use of 50-percent trim in the production of LFTB.

Reduced use of LFTB also has increased the price of 90-percent lean beef. To use
the extra fatty trim, more lean beef is needed for blending. The American Meat
Institute estimated that an additional 1.5 million head of cattle would be needed to
supply the amount of beef necessary to replace the lost use of LFTB. The relatively
tight supplies of lean beef provided support for a price increase of 90-percent lean
beef and the cull cattle from which it comes. The price of fresh 90-percent lean beef
trimmings increased steadily from $1.72 per pound in October 2011 to $2.22 per
pound in April 2012. Beef analysts expect the price of 90-percent lean beef to
continue to rise as more lean beef trimmings are needed to replace LFTB in ground
beef (Greene, 2012). The average annual retail price of all fresh beef increased, on
average, from $4.44 per pound in 2011 to $4.63 per pound in February 2012, and,
except for April, has continued to set successive monthly records. This means that
the potentially reduced supply of beef from the loss of LFTB would further
augment beef prices.

Consumer response to the media portrayal of LFTB as pink slime significantly
affected markets for beef trim, especially fattier trim. LFTB production has slowed
and LFTB-producing plants have shut down, costing jobs. As a result, beef
producers have seen a reduction in 50-percent lean beef prices and its effect on the
carcass value of fed cattle. The lost use of 50-percent trim to produce LFTB
provides support for 90-percent lean beef prices and, consequently, prices for cull
cows, bulls, and imported processing beef. While prices for ground products
continue to increase due to the reduced supply of lean beef from the loss of LFTB,
the offsetting effects lead to an ambiguous net outcome for the cattle industry. In
addition, historically low cattle inventories and year-over-year lower beef supplies
due to factors outside the LFTB debate have supported beef prices at high levels.
The beef cattle industry’s current focus is on mitigating the effects of media
portrayals of LFTB. Continuing consumer resistance to LFTB will provide support
for lean processing beef prices.

Poultry

Broiler Meat Forecast for 2013 Lowered

With sharply higher prices expected for both corn and soybeans, the broiler meat
production forecast was lowered for 2013, by 600 million pounds, to 36.5 billion
pounds. The production estimate for 2012 rose to 36.97 billion pounds due to a
slightly higher preliminary estimate for the second quarter and an increase of 50
million pounds to the forecast for the third quarter.

Broiler meat production in June totaled 3.1 billion pounds, 5 percent below the
previous year. Part of the reduction was due to one fewer slaughter day in June
2012 compared with the previous year. With the lower June production, total
production for second-quarter 2012 was just under 9.4 billion pounds, 1.4 percent
lower than second-quarter 2011. This is the third consecutive quarter of year-overyear
declines in broiler meat production. In the first half of 2012, broiler meat
production was 18.5 billion pounds, 1.8 percent lower than a year earlier. Broiler
meat production is expected to be mixed in the second half of 2012, with lower
production in the third quarter, but higher production in the fourth quarter. Starting
in the fourth quarter, sharp increases in feed grain prices and continued economic
uncertainties in both the domestic and foreign sectors is expected to push broiler
integrators into cutting production. Production in the second half of 2012 is
expected to total 18.5 billion pounds, slightly higher than in the same period
in 2011.

Over the first half of 2012, the number of broilers slaughtered was 4.2 billion, a
decrease of 2.4 percent from a year earlier. One factor that has slowed reductions in
broiler meat production during the first half of 2012 has been higher average
liveweights at slaughter. During the first 6 months of 2012, the average liveweight
at slaughter was 5.83 pounds, up 0.7 percent from the first half of 2011. In the
second half of 2012, the number of broilers slaughtered is expected to be down
from the previous year, but average bird weights at slaughter are expected to remain
close to the previous year.

The number of chicks being placed weekly for growout averaged approximately
163 million during period of July 7 - August 4, down 0.6 percent from the same
period in 2011. Weekly placements of broiler eggs in incubators point to a slightly
lower number of chicks available for growout compared with the previous year. In
the week ending July 28, the number of eggs in incubators was 1 percent higher
than in the equivalent week the previous year. This marks the first time incubators
numbers have been higher than the previous year since the week ending April 23,
2011. Egg sets for the week ending August 4 were fractionally higher than the
previous year.

Broiler stocks in cold storage totaled 607 million pounds at the end of June, down
15 percent from a year earlier. Most categories of broiler stocks that are shown
individually had strong declines compared with the previous year, where stocks of
whole birds were down 49 percent, breast meat down 33 percent, leg quarters down
27 percent, and wings down 36 percent. These declines were countered partially by
gains in cold storage holdings of legs (up 45 percent) and of the products included
in the “other” category (up 7 percent). Cold storage stocks are expected to remain below year-earlier levels during the third quarter, but move slightly higher in
fourth-quarter 2012 and remain higher on a year-over-year basis during 2013.

Wholesale prices for many broiler products over the first 7 months of 2012 have
averaged well above the previous year. Whole bird prices have averaged $0.86 per
pound, 7-percent higher than the previous year. Prices for broiler parts, such as leg
quarters and wings, were also much higher. Leg quarter prices averaged $0.53 per
pound, a 20 percent increase from a year earlier and wing prices averaged $1.81 per
pound, a huge jump of 101 percent from the same period in 2011. With higher
production expected in third-quarter 2012, whole bird prices are expected to
average $0.80-$0.82 per pound for that quarter down from $0.86 per pound in the
second quarter. With lower productions in 2013, the price for whole birds is
estimated at $0.84-$0.90 per pound for the year.

Broiler Exports Rise 13 Percent in Second Quarter

Broiler meat exports in second-quarter 2012 totaled 1.79 billion pounds, slightly
higher than previously forecast and over 200 million pounds (13 percent) more than
in the same period in 2011. Shipments in June totaled 593 million pounds, very
close to the amounts exported in April and May. Mexico continued to be largest
market for US broiler meat, with shipments in June of over 100 million pounds, or
15 percent higher than the previous year. Shipments in June also were also much
higher to Russia, the Baltic countries, and other FSU (Former Soviet Union)
countries. These gains were partially countered by smaller shipments to a number
of Asian countries, such as Hong Kong, Korea, and Japan.

With expected higher prices as a result of lower production, the broiler export
forecast for 2013 was lowered. Shipments in 2013 are expected to total 6.95 billion
pounds, down 2 percent from 2012, as some price sensitive buyers scale
back purchases.

Turkey Production in 2013 Expected at 5.8 Billion Pounds

The forecast for turkey meat production in 2013 was reduced by 135 million pounds
to 5.8 billion, a decline of 2.7 percent from 2012. Turkey producers are expected to
reduce production in reaction to anticipated higher prices for turkey feed.

Turkey meat production during the first 6 months of 2012 was 2.9 billion pounds,
2.7 percent higher than in the same period in 2011. The increase in turkey meat
production resulted from a higher number of birds slaughtered, up 1.6 percent, and
an increase in live-weight at slaughter. Over the first 6 months of 2012, live turkey
weights averaged 30.4 pounds, up 1 percent from the same period in 2011.

The forecast for turkey meat production in the second half of 2012 is 3.0 billion
pounds, up 3 percent from the same period in 2011. The increase is expected to
come chiefly from a higher number of birds slaughtered, as average live weight at
slaughter is expected to be slightly higher than those of the previous year.

With more birds slaughtered and an increase in turkey meat production, turkey
stocks have expanded. At the end of June turkey stocks were up 7.6 percent from
the previous year to 547 million pounds. Stocks of both whole birds and turkey products were higher, with most of the growth attributed to larger stocks of turkey
products. With higher production expected to continue in the second half of 2012,
ending stocks for 2012 are forecast at 250 million pounds, up 18 percent from 2011.

Turkey Exports Higher in Second-Quarter 2012

Turkey meat exports totaled 185 million pounds in second-quarter 2012, an increase
of 8 percent from the same period in 2011. Turkey products shipments have been
steady throughout the first half of 2012, with first-quarter exports totaling 181
million pounds. Shipments to Mexico in the first half of 2012 have not been the
fastest growing, but at 198 million pounds, they accounted for 54 percent of
the total.

In June, turkey exports totaled 58.7 million pounds, 9.5 percent higher than in June
2012. Higher shipments to Canada, the Philippines, China, and Mexico accounted
for the bulk of the increase. As with other poultry products, the turkey export
forecast for 2013 was lowered from its previous levels due to expected lower
domestic production and higher prices. Exports in 2013 are expected to total 690
million pounds, down 40 million pounds from their previous forecast and 7 percent
lower than the forecast for 2012.

Total Egg Production Reduced for 2013

The forecast for total domestic egg production in 2013 was lowered by 100 million
dozen to 7.5 billion dozen, down 2 percent from the 2012 forecast. The lower
production, brought on by higher feed costs, is expected to result in higher domestic
prices and lower exports in 2013.

In the first half of 2012, table egg production was 3.3 billion dozen, up 1.1 percent
from the first half of 2011. However, production of hatching eggs fell by 3.7
percent compared with the previous year. The decrease in hatching egg production
was chiefly the result of the decline in broiler chicks needed for growout. Hatching
egg production in the first half of 2012 was 520 million dozen. Production of table
eggs is expected to be down slightly in the second half of 2012 and through 2013.
Production of hatching eggs, especially those from meat-type birds, is expected to
be below year-earlier levels in the second half of 2012 as broiler chick
production declines.

Wholesale prices in the New York market for a dozen grade A large eggs in the
second quarter averaged $0.98 per dozen, at the end of July. However, moving into
August, prices have spiked to over $1.50 per dozen. Even with table egg
production expected to be slightly higher in the second half of 2012, prices are
expected to be stronger than the previous year through the end of 2012. Wholesale
prices in the New York market for a dozen Grade A large eggs are forecast to
average $1.28-$1.32 for third-quarter 2012 and average $1.31-$1.39 in the
fourth quarter.

Egg Exports Much Higher in June

Total egg and egg product exports in June were the equivalent of 25.2 million
dozen, up 19 percent from the previous year. Much of the increase was concentrated in higher shipments to the three largest markets, Canada (up 15
percent), Japan (up 40 percent), and Hong Kong (up 48 percent). With the increase
in June, total egg exports in the first half of 2012 totaled 137.2 million dozen, down
2.1 percent from the same period in 2011. With shortfalls in egg production in the
second half of 2012 expected in Mexico and a number of EU countries, the export
estimate for 2012 was increased to 292 million dozen. However, with lower
production and higher prices expected next year, the export estimate for 2013 was
lowered to 251 million dozen, a reduction of 15 million dozen from last month.

Dairy

Drought Affected Feed Prices Will Lower Herd Size and Milk Production
in 2013 Over 2012

Exceptionally hot and dry weather throughout most of the United States, but
especially for the Midwest, has reduced expected US corn yields to an average
123.4 bushels per acre for 2012/13. By contrast, US corn yield in 2010/11 was
152.8 bushels per acre. Corn production for the upcoming 2012/13 season is now
forecast at 10,780 million bushels compared with the 12,358 million bushels from
2011/12. Corn prices on the cash market have soared and the season average price
for 2012/13 is now projected at $7.50 - $8.90 per bushel, a substantial increase from
July’s forecast $5.40 - $6.40 per bushel. Recent rains could rescue the soybean
crop; but, soybean production is forecast to be 2,692 million bushels for 2012/13.
Lower yields and lower-than-expected harvested acreage account for the decline.
Soybean meal production for 2012/13 is forecast at 36.0 million tons, a decline
from July’s forecast and a year-over-year decline as well. Soybean meal prices for
the upcoming season are projected at $460 - $490 a ton. According to the July
Agricultural Prices report, alfalfa hay prices have been steady at about $200 per ton
for the last 2 months and up 5 percent from July 2011. The forecast production
shortfall in feedstuffs is expected to raise feed prices for dairy producers in both
2012 and into 2013.

According to USDA/AMS, weekly estimated dairy cow slaughter turned
substantially upward in July. Higher apparent culling, combined with higher feed
prices, leads to a reduced 2012 herd size estimate of 9,215 thousand head in August.
While herd size is expected to be slightly higher on a year-over-year basis
compared to 2011, the US dairy herd is forecast to contract to 9,110 thousand head
in 2013. The severe drought will impact milk production per cow both this year and
next. In light of higher feed prices, USDA has lowered milk yield per cow to
21,705 pounds this year and 21,830 pounds in 2013. Consequently, the milk
production forecast for 2012 was lowered from July by 1.6 billion pounds to 200.0
billion pounds this year and to 198.9 billion pounds in 2013, a year-over-year
decline in production.

Projected milk equivalent imports for 2012 on a fats basis were raised in August to
3.7 billion pounds and to 5.5 billion pounds on a skim-solids basis. Strong imports
of butterfat, milk proteins, and casein during April, May and June supported the
higher forecast. For 2013, forecast imports were also raised to 3.6 billion pounds
on a fats basis as butterfat imports are expected to remain high. Imports on a skimsolids
basis were unchanged at 4.7 billion pounds as the pace of skim-solids imports
is not expected to carry into 2013.

Exports on a fats basis for this year were increased to 9.8 billion pounds on a fats
basis and to 33.4 billion pounds on a skim-solids basis based on a strong first half of
the year performance. The export pace is likely to slow in the second half of 2012
due to higher prices. Exports in 2013 were lowered from July’s projection to 8.9
billion pounds on a fats basis and to 32.5 billion pounds on a skim-solids basis as
reduced supplies and higher prices are expected to impact all dairy exports.
Milk equivalent stocks on both a fats and skim solids basis were tightened for both
2012 and 2013. Lower expected milk production, especially in 2013, will
contribute to the tighter stocks position. Prices across the board are expected to be higher for the rest of 2012 and in 2013 than previously forecast. Product prices will
be higher in 2013 than in 2012, but will still be below 2011 prices. The cheese
price is forecast at $1.635 - $1.655 per pound this year rising to $1.640 - $1.740 per
pound in 2013. The forecast butter price was also raised from July to $1.535 -
$1.575 per pound in 2012 and to $1.515 - $1.645 per pound in 2013. The nonfat
dry milk price forecast was increased in August to $1.250 - $1.270 per pound for
the current year and to $1.350 - $1.420 per pound in 2013. Whey prices were also
raised to 55.0 - 57.0 cents per pound and 57.0 - 60.0 cents per pound for 2012 and
2013, respectively.

The higher forecast product prices are reflected in the class milk prices and in the
all milk price. The Class III price is forecast at $16.50 - $16.70 per cwt this year
and at $16.70 - $17.70 per cwt in 2013. The Class IV price was increased in August
to $15.10 - $15.40 per cwt in 2012 and to $15.90 - $17.00 per cwt in 2013. The all
milk price is projected at $17.55 - 17.75 per cwt and $17.80 - $18.80 per cwt for
2012 and 2013, respectively.